YC Partners and General Counsel: Legal Mechanisms and Common Issues for Startups
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YC Partners and General Counsel: Legal Mechanisms and Common Issues for Startups
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Note: This article is part of the TechFlow special series "YC Startup Class Chinese Notes" (updated daily), dedicated to collecting and organizing Chinese translations of YC course content. The second installment features an online lecture by YC partners Carolynn Levy, Jon Levy, and YC General Counsel Jason Kwon titled "Legal Mechanics for Startups."
Transcript as follows:
Geoff Ralston:
I'd like to introduce my colleagues—Carolynn Levy will be discussing startup mechanics here, along with Jon Levy and Jason Kwon, who will answer your questions about launching a company and legal matters. These three have worked with countless startups and seen situations you can't even imagine—they're among the top legal experts in the startup world.
Carolynn Levy:
In 2014, Kirstie and I gave a talk at Startup School on legal and accounting mechanics. We recommend watching that before today's session. I'll revisit this topic and summarize the key points. However, since Kirstie will give a separate talk later in the program, I’ll skip over investor and fundraising topics. Instead, I’ll focus on common mistakes founders often make.
First, when starting a company, you must form a separate legal entity—that is, incorporate. Incorporation simply involves filing a document called the Certificate of Incorporation, which is straightforward and fast for startups. You then need to file with the Secretary of State in whichever state you choose to register.
We strongly recommend incorporating in Delaware because the process is simple, fast, and efficient. That’s our main reason.
Most public companies are incorporated in Delaware, so if you plan to go public, doing so now saves time later.
Additionally, some investors may require you to be incorporated in Delaware before investing—another strong incentive to incorporate there. We highly recommend using an online platform designed specifically for startups. There are many such platforms—some good, some not so good.
We’ve mentioned Clerky and Stripe Atlas, both excellent choices. We have extensive experience with Clerky, and we’re happy to note that Darby Wong, one of Clerky’s founders, will join our AMA session. What makes Clerky and Stripe Atlas great is that they don’t just help you incorporate—they also provide follow-up documentation. Some weaker platforms stop after incorporation and offer no further support.
One thing that can happen if you don’t take action post-incorporation is that founders fail to purchase their own stock. On our way here today, Jason reminded me of a story: At a large company represented by a major law firm, the founders didn’t realize until Series B funding that they had never actually bought their shares—an actual, real-world mistake.
Another important step during incorporation is forming a board of directors. For early-stage startups, the board typically consists of the founders. If you're a solo founder, you can have a one-person board; if two founders, a two-person board.
Some believe the board must have an odd number of members, but that’s not required. Next, you need to appoint corporate officers. You’ll need a President or CEO—you can hold that role yourself if desired. In Delaware, you must also appoint a Corporate Secretary.
It’s also advisable for startups to adopt bylaws, though these can be quite generic.
Finally, while not part of the formal incorporation process, I strongly recommend opening a corporate bank account as soon as possible.
Most startups don’t have much money in their accounts initially, but it’s crucial to develop the mindset and habit of treating the company as a distinct entity. Sound financial management practices around company funds are essential.
Now let’s return to the issue of issuing founder stock we mentioned earlier.
A company is owned by its shareholders—you and your co-founders will be the first. If you have multiple founders, you must decide how to divide the equity.
We believe equity should be allocated based on contribution and effort. Don’t overvalue the person who came up with the idea—the real work happens collectively, and all value is created going forward.
If everyone contributes equally, equity should be split equally. If you struggle to agree on equity distribution with your co-founder, it may signal deeper issues around trust or commitment—pay close attention to that.
Founders must purchase their shares from the company. You do this via a stock purchase agreement, but you must actually pay for them. Fortunately, shares in a new company are very cheap. Most founder stock purchases work like this: You pay a small amount of cash and contribute any intellectual property you’ve developed—that’s the total price for your founder shares.
Founder shares are subject to vesting, which aligns with the principle that ownership reflects ongoing contribution. Vesting means you earn full ownership of your shares over time.
During the vesting period, you retain voting rights on your shares. But if you leave the company before vesting completes, the company can repurchase any unvested shares.
Shares that are subject to vesting are called restricted stock. So your founder stock purchase agreement is effectively a restricted stock purchase agreement. The standard vesting schedule is four years, and every company needs a cap table to track every share issued.
I won’t go into cap tables in detail here because Kirstie will cover them thoroughly in her lecture on fundraising mechanics. But the basic idea is that every company needs a cap table to record every share it has issued.
In the past, we had to manage this through complex Excel spreadsheets, but now multiple online platforms make tracking equity ownership easy. We’ll ensure those resources are available on the forum.
It’s a good idea for founders to pay themselves at least a minimal salary. While many founders can’t afford to pay themselves early on, if funds allow, they should do so whenever possible.
Additionally, all founders and anyone else working for the company should sign a CIIA or PIIA—the Confidential Information and Invention Assignment Agreement—to protect trade secrets and ensure all IP created belongs to the company.
Startups often can’t afford to pay employees, but the solution isn’t convincing people to work for free. For non-founders, creating valuable IP without compensation carries significant risk. Unfortunately, everyone ends up doing everything until the company can afford to hire properly.
Forming a company protects founders from personal liability for company actions and provides the proper structure for holding IP. It’s also necessary for raising real capital—no serious investor will wire money to a personal bank account.
Beyond fundraising, reasons to form a corporation rather than an LLC include: only corporations can sign contracts with suppliers, consultants, or potential customers; most angel investors and VCs won’t invest in LLCs. So if you plan to raise money beyond friends and family, your startup must be a corporation.
Once incorporated, open a corporate bank account and use it for all business expenses. If the account lacks funds, use your personal savings to cover costs, keep all receipts, and triple-check that all legal documents are properly signed and dated.
The company must also pay taxes and file corporate tax returns and payroll taxes. Store all legal documents securely—for example, in a shared Dropbox folder—so all relevant parties can access them.
When fundraising and investors conduct due diligence, submitting incomplete or unsigned documents looks extremely unprofessional.
Building a real company is critical—it must function as a board-governed, managed, tax-compliant entity employing founders and safeguarding confidential information.
This is also key to securing personal liability protection and establishing a legitimate legal entity. The right time to incorporate varies, but generally speaking, the sooner the better.
Incorporation protects founders from personal liability and creates the proper vehicle for owning IP. Also, you cannot raise serious funding without first incorporating. Beyond fundraising, incorporation enables contract signing, supplier relationships, and more. If you plan to raise money from outside friends and family, your startup must be a corporation. If your situation becomes complex or you’ve already formed a non-U.S. entity, hiring a lawyer to handle incorporation is usually necessary.
A single founder without authority still won’t attract investors. Founders must read and understand all terms in company documents to prevent surprises regarding their stock. People working for the startup should be compensated. Equity can be part of compensation, but paying solely in stock is not advisable. Consultants and independent contractors can accept stock for services, but this must comply with applicable rules.
Also, ensure you use a solid consulting agreement defining the relationship clearly, so the company owns all deliverables. Otherwise, problems may arise.
This is an important issue. My co-founder and I no longer want to work together. Sometimes it’s minor, sometimes fatal. Startups die from this all the time—and it can get ugly.
It’s a bit like watching a divorce. That’s why we emphasize these points: paying attention to vesting, ensuring founders buy their stock, having a CIIA that clearly assigns IP to the company.
Doing these things greatly reduces the legal drama of a breakup. I don’t know what reduces the emotional drama—but this reduces the legal one.
I have employees at my company and promised to grant them stock. As long as you take proper steps, this isn’t a problem. Creating an equity incentive plan and granting stock to early employees is the right approach. A stock plan is a 15- to 20-page document specifying a pool of common stock reserved for the plan.
Under the plan, the company can issue restricted stock or stock options. But know this: if you grant stock options, you need a valuation (called a 409A appraisal). Most startups avoid this until after a funding round. So instead, you can issue restricted stock under the plan—employees will still vest. And there are complex tax rules involved, which is why the plan is so long.
But don’t wait too long—because the longer you wait, the more expensive your stock becomes. You want to give employees cheap stock, or keep it as affordable as possible, because expensive stock doesn’t motivate well.
I received a cease-and-desist letter. Another company claims our name infringes their trademark. This is something early founders really don’t need—but we see it often. Founders fall in love with their company name, making it hard to let go. But your company is likely too young to have built significant value under that name, and fighting a larger, better-funded company over trademark could be costly and distracting. Your best move is often to let it go and not get overly attached to the name.
Relatedly, some of you asked whether it’s worth registering your company name or securing an official trademark. Generally, we think trademark registration can wait. It’s nice to have, but not essential in the early stages.
Finally, I found a great name, but I have to pay $100K for the domain. This happens often. Again: don’t become too attached to a name, or you might make bad decisions. Spending time and money suing over a trademark claim is usually a poor decision—and sinking big money into a domain name often is too.
So naming requires careful research—not just surface-level thinking about product features, but deeper exploration—then take the cheapest, most effective path and move forward.
Jason, when does the 30-day window for filing IRS Form 83(b) election start? Could you first explain what the 83(b) election is?
Jason Kwon:
When you buy stock, if you don’t file an 83(b) election, you’ll owe income tax on the stock each year as it vests, based on its fair market value at that time—regardless of whether you’ve sold it.
But if you file an 83(b) election, you pay tax upfront based only on the difference between the stock’s value and what you paid for it on the purchase date.
So if you’re a startup founder buying shares at a nominal price, filing 83(b) lets you lock in minimal tax and avoid future taxation as the stock appreciates.
If you miss the ~30-day deadline, you lose the ability to file 83(b)—which could result in massive tax liability later.
So pay close attention to the date on your restricted stock purchase agreement—and file the 83(b) election on the same day you purchase the stock.
Keep copies of the election form. Individual founders should keep it with their tax records, but the company should also retain a copy.
Carolynn Levy:
Pay special attention to the date on your restricted stock purchase agreement—it should be the same day you write that $1 check… Pay attention. You want all of this to happen simultaneously, so don’t worry about the exact start date.
Also, the company must keep a copy of the 83(b) election. Founders keep it for their tax filings, but the company needs it too. Put it in your shared Dropbox, confirm it’s signed and dated, store it securely—and make sure the company always has access. This is truly important.
Jason Kwon:
This is one of the few irreversible mistakes—one of the few things you absolutely must remember. If you forget, file that 83(b) election immediately. Fixing it later is difficult and extremely expensive.
Carolynn Levy:
We’ve received many questions about immigration. Here’s an example: I’m in Canada—can you help me get a TN visa so I can start a company in the U.S.?
Jon Levy:
That’s really difficult… Geoff said we know a lot about many things, but immigration isn’t our specialty.
In this case, you need to talk to an expert—especially if you have this opportunity. You need to be employed by a company, as Carolyn mentioned earlier.
If you can’t work legally in the U.S., you can’t be hired—that would be illegal. So consulting an expert is likely your best bet.
Immigration is a very tricky area, clearly tied to politics.
So while the landscape keeps changing, it’s more art than science. For us, grasping immigration basics is extremely difficult.
If you’re not an expert in this, you definitely need professional advice.
Carolynn Levy:
Jason, should I be a C-corp or an S-corp?
Jason Kwon:
C-corp.
If you incorporate in Delaware, you automatically become a C-corp by default.
To become an S-corp, you must make a specific election on your tax return.
The difference: An S-corp is pass-through taxed—transparent for tax purposes. All income flows directly to owners. A C-corp pays tax at the corporate level on its profits.
You want to be a C-corp because that’s the entity type investors are familiar with and prefer.
Moreover, when you receive investment from external investors, it usually disqualifies you from S-corp status anyway.
Carolynn Levy:
Jon, during incorporation, how much equity should we reserve for our first hires or key employees?
Jon Levy:
It depends on the size of your company and how many people you need to hire.
Cost-saving advice might suggest hiring only when absolutely necessary, not proactively. But that mindset works against building a strong team.
If you want to retain great talent, offer generous, consistent equity packages to position them well within the company. This is especially important—if you have excellent people, find ways to keep them and grow together.
Think long-term and build a healthy culture that supports everyone’s success.
Carolynn Levy:
Regarding online platforms—Clerky and Stripe Atlas—I know Clerky definitely has this feature… You can create an option pool when incorporating, if you want.
So if you've thought ahead and know you want a plan, you can set it up at incorporation.
That said, most companies actually wait until later to establish an option pool.
Jason, is having unpaid interns illegal?
Jason Kwon:
Generally yes—interns are typically considered employees. There are exceptions, such as university internship programs where students receive academic credit.
But you need to carefully review the rules, possibly consult a lawyer. If you’re getting meaningful help, you should compensate fairly.
Also, as Carolyn mentioned, people can work as contractors, but specific criteria must be met to classify someone as a contractor rather than an employee. Recent rulings by the California Supreme Court have made this harder.
Carolynn Levy:
We once had a YC company with 14 unpaid interns—total disaster.
Jon, what are the best legal practices for launching a nonprofit venture?
Jon Levy:
I got all the unanswerable questions—that seems fair. Nonprofits are completely different from for-profits—a different animal altogether. Governments don’t like nonprofits because they generate no tax revenue.
So if you want to be a nonprofit, the government will make it hard—requiring many steps and forms, possibly taking nine months.
While neither I nor YC are experts in this, we do fund nonprofits and allow them in our programs. Briefly: you must serve a public benefit, the organization must exist for that purpose, and you must disclose certain info—including top five salaries. I’m not an expert here, so I’ll stop, but nonprofits are fundamentally different.
Carolynn Levy:
You raise funds from foundations, not VCs—completely different beast.
Jason, can I bring in a stranger as a co-founder?
Jason Kwon:
Generally, you want to work with people you know and trust.
Before bringing someone on as a co-founder, you’d ideally know how well you collaborate, whether you can build something together, and if you get along.
So if you want to maximize success, the answer is probably no.
Carolynn Levy:
Even if the questioner means advisor or partner rather than co-founder, the underlying message is clear: don’t work with strangers. I’d say never work with strangers. It goes back to founder breakups. Working with someone you just met often leads to disaster. We see siblings fight over equity; founder conflicts span deep relational layers. With strangers, you’re setting yourself up for internal conflict.
Jon, when deciding where to incorporate the parent company, what key factors should you consider?
Jon Levy:
Market, business operations, and identity are key factors in choosing where to incorporate the parent company.
Most choose the U.S. because they’re targeting the U.S. market—a massive opportunity. Similarly, if you’re selling in India, incorporate there.
Though it can get complex, when I talk to startups, I always advise simplicity.
Incorporation involves legal procedures that sound boring but are actually simple: keep documents organized, buy your shares, file 83(b) correctly.
Once you buy shares and file 83(b), there’s not much else. As long as you’re diligent, it’s manageable.
Despite talk of parent-subsidiary structures and complexity, I was confused too when I first heard it.
Carolynn Levy:
Yes, you’re making it unnecessarily hard on yourself.
Jason, with the explosion of legal tech tools, maybe I don’t need traditional lawyers until a serious angel or institutional round. When do you recommend switching from these tools to a traditional law firm? How should work be divided?
Jason Kwon:
There are many good tools now, so you can go far using services like Clerky or Stripe Atlas.
But if you plan to raise substantial funds, I recommend hiring a lawyer. Many agreements require customization or negotiation. For simple incorporation and setup, these tools suffice.
When issuing stock to employees, it’s best to involve professionals—mistakes can cause real trouble. And you don’t want errors in binding commitments. So sometimes, hiring outside counsel is essential so you can proceed confidently. Of course, for routine tasks, you can handle them yourself—no need for a lawyer.
Carolynn Levy:
Jon, this is similar to my earlier question, so the answer may be the same—but feel free to repeat.
From a legal standpoint, can I start a startup and sell it while keeping my full-time job? If so, what should I consider?
Jon Levy:
I recall Geoff mentioned this earlier, but achieving this is practically impossible.
I’ve never seen a company started part-time on weekends grow into a huge success. Maybe you can begin small, but that’s a hobby or side project. Building and scaling a real business demands full-time commitment and immense energy.
So while I don’t mean to sound dismissive, I think it’s nearly impossible. This isn’t a side gig—it requires total dedication.
Carolynn Levy:
Jason, are patents worth pursuing?
Jason Kwon:
Simply put, patents are useful for protecting technology, especially against competitors copying your tech. But for software startups or internet-based tech companies, patents are often less important. Software patent protections have also weakened under current law. So in software, success usually hinges on execution, not legal protection via patents.
If you’re in life sciences, competitors can more easily replicate your work, so patents become much more valuable.
If you’re unsure whether your technology qualifies for strong or weak patent protection, consult a patent attorney or specialist.
However, ultimately, no company raises money purely on its patent portfolio. Funding depends on the strength of the founding team and their ability to execute. Patents are just one piece of solving the puzzle.
Carolynn Levy:
Jon, I’m considering forming an advisory board. Should advisors receive equity?
Jon Levy:
From my experience, advisory boards are more common outside the U.S. and Silicon Valley.
In Silicon Valley, you might see life science companies form advisory boards with academics or professors who help legitimize the company and may receive equity.
But equity shouldn’t be handed out casually. Ideally, good advisors should be investors willing to pay for stock. Just as people should pay to invest in my company, I think that’s the best filter—rather than giving away free advice.
Of course, this isn’t a rigid rule. For life science companies, granting equity to advisors may make sense—but I try to avoid it.
Carolynn Levy:
Jason, when a founder has to fire a co-founder who’s a close friend, what do you see them do?
Jason Kwon:
Has anyone here ever lived with a friend who later became an ex-roommate? Sounds familiar? So it’s best not to start a business with a friend—so you can stay friends.
If you start a company with a friend and it fails, it’s often because you disagree on direction, or one person works harder than the other.
Usually, it’s best to address the issue quickly—or essentially end it—rather than let it fester, hoping it resolves itself over time, which only makes it worse. It harms both the company and the friendship.
So overall, it’s better to resolve it as soon as possible.
Jon Levy:
Yes, I’d add this: The biggest mistake we see is people delaying, thinking, “Oh, it’ll work out—this is my friend, things will change.” If the relationship isn’t sustainable, it’s better to end it. Specifically, to protect a good friendship—including in a business context.
Carolynn Levy:
Okay.
So Jon, what’s the best way to identify potential gaps in a privacy policy?
Jon Levy:
This is a very sensitive startup topic. If you’re a lawyer facing tricky issues, it might justify early spending.
But now there are excellent online generators for privacy policies and terms of service. Major law firms also offer such tools.
If you have unique or complex needs, I’ll share more in the resources section.
This is absolutely essential. If you collect personal data, you must have a privacy policy on your website or app—especially if operating in California.
So do this properly and use reliable services. In some cases, you may need a lawyer.
Carolynn Levy:
As many of you may know, if you collect personally identifiable information from individuals in the EU, you’re subject to GDPR—a massive compliance burden.
Even excellent privacy policy generators may not fully cover GDPR requirements. If you run into trouble, you may still need legal help.
Let’s see—Jason, as co-founders and founders of a startup, should we work 18 hours a day? How do we measure and manage our commitment to the product?
Jason Kwon:
We advise all startups to maintain exercise, good sleep habits, and normal social relationships. Working 18 hours a day isn’t recommended—except perhaps for short sprints requiring intense effort. Remember, building a company is a multi-year journey. It shouldn’t be approached like a sprint, but like a marathon—steady and sustainable.
Carolynn Levy:
Jon, should we have a shareholders’ agreement? What should a good one include?
Jon Levy:
Shareholders’ agreements are more common outside the U.S.—they detail what happens if someone leaves or founders split. Some companies use them, but we believe simplicity is key in startups. If the company fails, there may be no assets to divide—unlike a marriage needing a prenup. To me, detailed Dutch-style documents about bankrupt companies with zero assets seem like wasted time.
Carolynn Levy:
Regarding shareholders’ agreements, I think the asker meant the founder agreement Jon described. Shareholders’ agreements arise when companies sell preferred stock to investors, like in a Series A. These agreements cover many of the issues Jon mentioned, but they’re between the company and investors—not the same as general information. This is a very U.S.-specific point, just to avoid confusion.
The last question is about preventing outsiders from seeing round details. Many companies’ funding info appears on PitchBook, CrunchBase, etc., because corporate charters and filings are public. Currently, there’s no way to fully hide company details.
Jason Kwon:
Technically correct—there are limited ways to obscure some info from tenants. However, the Certificate of Incorporation is a public document. Anyone can pay $100 or so to pull the charter and see certain details of your company.
This seems like just one item on a priority list. While many companies appear on PitchBook, performance differences aren’t due to listing there—but other factors.
Carolynn Levy:
Regarding B-Corps—hybrid for-profit entities focused on public benefit. Fiduciary duties for management and directors differ from standard corporations. Investors seeking high-growth, fast-scaling startups may question a B-Corp’s appeal. However, several companies have transitioned to B-Corp status and operated successfully for five to six years.
Jon Levy:
Yes, this question touches on corporate structure and equity planning. Sounds like you have a SaaS company in Australia eyeing the U.S. market, but unsure where to restructure. Know where your customers are to make the best decision. Complex structures may feel off-putting, but in this case, a parent-subsidiary setup makes sense.
Carolynn Levy:
We recommend incorporating in the U.S. because fundraising is easier and terms are more favorable—better for long-term growth. If you also want to raise funds in Australia, keep the Australian entity as a subsidiary and incorporate a U.S. parent.
When adding a new co-founder about a year in, you don’t need to reset the original founders’ vesting schedules to match the new one.
Suppose you and your original team hold shares with a four-year vest. A year later, you bring on a fourth person you believe in—but not everyone is a true co-founder; sometimes it’s just a key employee.
In any case, original founders keep their existing vesting. The new co-founder starts a fresh four-year vest from their start date. When investors come in, they may reset everyone’s vesting—but unless your leverage is zero, don’t let that push you back to square one.
Investors may also request extended vesting, depending on leverage and their terms. So don’t be surprised—this happens often.
Jon Levy:
When you have a U.S. company, how do you hire employees outside the U.S.?
It depends on the country, as each has different rules defining employees vs. contractors and their requirements.
When establishing significant operations abroad, you typically need a local entity—either a branch or a simple office.
Your choice also depends on the target country.
Do you have a favorite country? I like India.
Typically in India, you’d form a subsidiary owned by the U.S. parent (Delaware corporation) and one or two Indian representatives holding 1% each, with the remaining 99% held locally. Then the subsidiary hires Indian employees.
To avoid this structure, consult someone licensed in India about employment law—each country, like the U.S., has different rules distinguishing employees from
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